The power of investing in super

To provide for your standard of living in retirement, some experts say you need to set aside 15%1 of your salary each year in super. That means adding to your super on top of the 9% your employer contributes.

In this edition of Better Investor Online, we’ve outlined three super strategies that may allow you to add to your super investment by taking advantage of super’s favourable tax environment.

And if you’re confused as to whether it’s better to invest in your super, or increase your investments outside of super, we’ve also compared our super strategies to similar investment strategies outside of super. The results clearly show that if you want to build wealth for life after work, you should turn your attention to the power of investing in super.
Strategy 1: Boosting your super with after-tax contributions

One way to boost your savings for life after work is to make after-tax contributions to your super. Within super, the maximum tax paid on investment earnings is 15% compared to marginal tax rates on investment earnings outside of super.

The chart below compares the earnings generated by making a $5,000 contribution each year over ten years in super to investing the same money in an investment outside of super.

As you can see, because investment earnings in super are taxed at a maximum of 15%, at the end of ten years your super earnings could stack up to over 50% more than investing the same funds outside of super.

Assumptions for after- tax contributions case study: 7% return (after fees, but before tax) is assumed for super and non-super investments.  The marginal tax rate plus Medicare levy paid on the earnings of the investment outside super is 41.5%.  Within super, the tax on earnings is 15%.  2007/08 income tax rates and thresholds are used.  These may change in the future.

1_Source: The ASFA Submission, Improving the superannuation savings for people under 40, August 2005, page 12. The 15% is a guideline only and varies depending on the number of years remaining to retirement and desired income in retirement.

 

Strategy 2: Boosting your super if you earn less than $58,980 pa

More good news is that if you earn less than $58,980 pa and make an after-tax contribution to your super, you could also be eligible for a Government super co-contribution of up to $1,500 pa.

The chart below demonstrates how a person on a salary of $35,000 pa receiving their employer’s super contribution can make an after-tax contribution of $1,000 pa to take advantage of the government co-contribution, receiving in their super fund an additional $26,948 over a ten year period. 

Once again, the chart shows that by making an additional after-tax contribution of $1,000 every year for ten years, and by taking advantage of the government’s super co-contribution scheme, your super investment could be worth over 60% more.

Assumptions for the super co-contributions case study: Assessable income and Reportable Fringe Benefits is $35,000 in 2007/08.  Salary is indexed to Average Weekly Ordinary Time Earnings (AWOTE).  Super Guarantee is 9%. Tax on SG contributions is 15%. After tax contributions are made in June of each financial year. Contributions tax is paid at the end of each financial year on employer SG contributions. Final co-contribution is paid in year 11. These amounts do not include the final co-contribution payable in year 11. Balance includes employer SG and after-tax contributions and co-contribution payment where applicable. The balance after ten years does not take benefit tax into account.

 

Strategy 3: Boosting your super with pre-tax contributions

Adding to your super from your salary (before tax) lets you top up your superannuation tax effectively, and there are clear benefits to adding to your super in this way. For example, your taxable income is reduced, and your super contributions are taxed at just 15% in the fund instead of your marginal income tax rate if you took the same amount as cash salary.

The chart below demonstrates the benefit of investing $5,000 pa in super via salary sacrifice over a ten year period, as opposed to investing the same amount outside of super.

As you can see from the above chart, the balance at the end of ten years is over 60% higher when investing within super. This is because investing $5,000 pa into super from your pre-tax salary would only incur contributions tax of 15% in the fund and the net contribution would be $4,250. If you chose to invest outside super from your take home pay, in this example, you would pay tax on your salary at your marginal tax rate of 41.5%, leaving you only $2,925 to invest.

Assumptions for salary sacrifice case study: Marginal tax rate plus Medicare levy is 41.5%. 7% return (after fees, but before tax) is assumed for super and non-super investments.  Tax on all super contributions and earnings is 15%.  Benefits are taken at age 60 or over.

 

Information you should know

The outcomes in these case studies are illustrative  in character. Whilst every effort has been taken to ensure the assumptions on which the outcomes are based are reasonable, the outcome may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The actual outcomes achieved may differ from these case studies.

No member of the Westpac Group, or the BT Financial Group, or any of their employees or directors gives any warranty of accuracy or reliability nor accepts any liability in any other way, including by reason of negligence for any errors or omissions contained herein, to the extent permitted by law.